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Is It Still Insider Trading If You’re an Idiot?

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Do you enjoy goofy insider trading hypotheticals? I think we all know the answer to that. Here is one:

Mr T is a man well known in City circles. He is regarded as incompetent; nobody understands why he keeps his job as an analyst. One day, he sends his friend an email telling him that A Co is about to make a bid for B Co; he does not tell his friend how he knows this, but it is, in fact, because he has confidential information learned in the course of his employment. His friend makes a profitable trade on the basis of this information. Such is Mr T’s reputation that, had the reasonable investor seen this email at the time, he would have entirely discounted the information contained in it, being able to place no reliance at all on anything coming from Mr T. We ask: Can Mr T successfully contend that he has not disclosed inside information because the information coming from him would have no significant effect on price because no-one (except a gullible friend) believes anything he says? Our answer is: Of course not. Mr T has disclosed accurate information; and that information is clearly information of a kind which a reasonable investor would be likely to use as the basis of his investment decisions. The fact that the market would not respond to the information because it came from Mr T does not mean that the information itself would not be likely to have a significant effect on price.

That is from this English appeals tribunal ruling on the insider-dealing case of Ian Hannam, which is 130 pages long and full of this sort of epistemological lunacy. I hope England has a Nest/Nestor wrong-stock-insider-trading case soon because their courts seem equipped to handle that sort of thing with the hilarity, and enormous length, that it deserves.

The story of Ian Hannam is basically: He was a banker at JPMorgan Cazenove, representing Heritage Oil plc.1 He sent some e-mails to Ashti Hawrami, the Kurdish oil minister, about Heritage. Those e-mails contained some information, about a potential buyer of Heritage assets and about Heritage finding oil in Uganda. The U.K. Financial Conduct Authority thinks it was inside information and he shouldn’t have sent it to Hawrami. Hannam thinks it wasn’t inside information and that, even if it was, he sent it to Hawrami as part of his work for Heritage, which had oil interests in Kurdistan and wanted to do more business there, and which needed Hawrami’s support to do a transaction.

The appeals court found that Hannam’s information was inside information. This is a little problematic because it was not what you would call true: The potential buyer for Heritage assets never made a serious offer for those assets,2 and Heritage had not in fact found oil in Uganda. It had found, instead, additional fuel for mad philosophy-of-language games:

Mr Hannam’s position is that Heritage had not found “oil” as that word would have been understood by either Dr Hawrami or by an objective investor or oil industry expert, all of whom would take a reference to “oil” as meaning black oil. At most, it had found the presence of liquid hydrocarbons during the course of drilling. The Authority accepts that black oil had not been found. Its position is that the words of the post-script taken in their entirety amounted to inside information as defined in the legislation.

Okay! But to oversimplify, the appeals court found that it was true enough, after expounding at enormous length on the hypothetical question of whether it could be inside information if it was entirely false. That question remains unresolved:

The Authority acknowledges, without conceding, that it may well be that something which is wholly made up, a fiction, and has no connection with the truth cannot be inside information.

Even if it was inside information, Hannam argued that he was just doing his job conveying nonpublic information to a potential counterparty — something that happens all the time in banking. But the appeals court found that, while Hannam was more or less doing his job in disclosing this information, he was not doing it well:

It cannot, therefore, be said that Mr Hannam was out on a frolic of his own (to draw on the language of vicarious liability) when he wrote and sent the emails. But nor can it be said that, even if Mr Hannam saw the provision of the information in the September emails and the October emails as something which would assist in achieving a transaction for his client, that it was therefore necessarily in the “proper” course of the exercise of his employment to disclose that information.

And in fact the UK Takeover Code allows disclosure of confidential information only “if it is necessary to do so” and if the recipient “is made aware of the need for secrecy,” which was at least disputed here. So on balance the court decided that Hannam was not properly doing his job by sending mostly-false braggy e-mails about his client to the Kurdish oil minister, and I guess when you put it like that you can see their point. As a connoisseur of insider-trading silliness, I enjoyed seeing this bit of silliness mapped into a new set of categories. Whereas in the U.S. we’d be talking about “materiality” and disclosure in violation of “a duty of confidentiality,” in the U.K. the questions are about whether the information is “of a precise nature”3 and disclosure “otherwise than in the proper course of the exercise of his employment.” These categories lead to subtly different results: In the U.S., what Hannam did seems very unlikely to be “insider trading,” though it might raise some questions about Regulation FD.4

Whereas the U.S. categories have, for the most part, become clear and standardized, the U.K. courts still seem to be figuring out their own rules, which accounts for the parade of crazy hypotheticals in this case. Certainly after reading this decision, and frankly before reading it, I have the impression that the U.K.’s law of insider dealing is considerably less clear than the (not un-murky) U.S. law. But, on the bright side, they seem to be having much more fun with it.

1 He is also a bit of a character, or, as the British put it, “no smoothy-chops in a pin-striped suit.” He’s a former soldier with mining interests in Afghanistan, and “known for his buccaneering spirit.” Here’s the tribunal’s impression of him:

Mr Hannam projected an engaging, yet forceful, personality; as Mr Boulton accurately describes him, he is a man with considerable personal charisma. We formed the impression of him as a man much more interested in and comfortable with the large picture than with the detail. This is reflected both in the unfocused nature of much of his evidence and in the attention which he gave to proper process in the course of his dealings with Dr Hawrami. His answers were very discursive and his thread on occasions not easy to follow. He occasionally diverted the question by becoming argumentative with Mr Boulton.

2 The problematic e-mail was sent on Sept. 9. On Sept. 18, Heritage announced that it was “in highly preliminary discussions with a third party regarding a potential disposal of certain of its assets.” Those discussions ended with that third party — Perenco — making a $400 million bid for Heritage’s Ugandan assets on Sept. 23, which Heritage’s chief executive called “just a futile waste of time and effort,” “blatantly ridiculous” and a “waste of everybody’s time.”

3 Leading to this gorgeous paragraph:

It is not, however, an express requirement that the information must be wholly accurate before it can qualify as inside information. We have already mentioned the opening words of section 118C(2) referring to inside information as “information [our emphasis] of a precise nature”. Thus “inside information” is a sub-category of “information”: we see no reason to restrict the meaning of “information” in section 118C(2) to wholly accurate information. Similarly, in identifying the meaning of “precise”, section 118C(5) commences with the words “Information is precise” where, again, we do not perceive a requirement that information has to be wholly accurate before it can be precise.

4 NOT LEGAL ADVICE, anywhere. Importantly Hawrami doesn’t seem to have traded — crucial in the U.S. but optional in the U.K. — but if he had, the U.S. law question would remain sort of interesting. (It would look parallel to the Mark Cuban case in some ways.) The U.K., incidentally, has disclosure rules that are stricter than Reg FD, and Hannam quite naturally raised the question: If this information was material, why didn’t Heritage have to disclose it? There is a fairly arid discussion of this stuff at pages 110-114 of the tribunal’s decision.